LIKE ANY FRONTIER, THERE'S MONEY TO BE MADE (EM WITH THE RIGHT BLEND OF LIQUIDITY, CREDIT QUALITY, AND FORESIGHT.

.PPA FEW COMPANIES AND INNOVATIVE REGULATORS ARE, TODAY, BEGINNING TO EXPLORE POWER GENERATION FOR THE YEARS AHEAD. INHABITING THAT LANDSCAPE WE FIND A CONVERGENT GAS/ ELECTRIC ENERGY SYSTEM, AN EPOCHAL REORGANIZATION OF THE STRUCTURE OF THE U.S. GAS/ELECTRIC INDUSTRIES, AND IMPRESSIVELY CREATIVE AND COMPETITIVE ENERGY SUPPLY AND MERCHANT BUSINESSES (SEE FIGURE ON PAGE 33). THIS INTEGRATED GAS/

ELECTRIC ENERGY SYSTEM WILL FALL INTO FIVE SEGMENTS:

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1) A COMPETITIVE POWER SUPPLY WITH A FEW LARGE AND MANY NICHE GENERATING COMPANIES, CLEARLY LINKED TO A COMPETITIVE GAS-SUPPLY INDUSTRY

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2) A QUASI-REGULATED (LARGELY FEDERAL OVERSIGHT) REGIONAL AND NATIONAL ENERGY "NETWORK" OF BIG WIRES AND BIG PIPES

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3) AN EXTREMELY COMPETITIVE BULK-ENERGY MARKET DOMINATED BY 20 TO 30 LARGE AND 5 TO 10 ENORMOUS WHOLESALERS AND TRADERS OF MOLECULES AND ELECTRONS

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4) A REGULATED, LOCAL-ENERGY LOGISTICS INDUSTRY (WITH STATE OVERSIGHT AND MULTISTATE REGULATORY AGENCIES) OF LITTLE WIRES AND LITTLE PIPES (THERE WILL BE NO SIGNIFICANT PURELY PIPE OR PURELY WIRE COMPANIES.)

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5) A COMPETITIVE ENERGY RETAIL INDUSTRY OF 10 TO 20 REGIONAL AND NATIONAL, UNREGULATED CYBERSPACE MERCHANTS THAT EACH PROVIDE THOUSANDS OF MASS-CUSTOMIZED ELECTRICITY, GAS, EFFICIENCY, ENERGY INFORMATION, AND ENERGY-RELATED CONSUMER FINANCING SERVICES TO MILLIONS OF CONSUMERS.

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GENERATION: RELENTLESS ENTERPRISE

The new power industry will be characterized by relentless improvements in technology, steady increases in the productivity of capital, balance sheet (not project) financing, highly efficient operations, and portfolio marketing. It will metamorphose from a rate-based function into an enterprise.

The decline of rate-based generation will be accompanied by the rise of enterprise and merchant generation. Change will appear gradually, and then take off. Net additions to the rate base in the form of built or contracted (i.e., QF) capacity will cease; net reductions will follow. Initially, the reductions will come from buying out existing QF contracts and depreciating utility plants. The next step will be substantial write-offs and rate-based generation asset spinoffs to shareholders of utilities, or sales to third parties and accelerated amortization of nuclear plants. Eventually "rate-based" generation will consist of "bad" (i.e., highly uncompetitive and unsalable) nuclear and coal units, and whatever captive and highly dispatchable capacity is required to support network integrity (probably less than one gigawatt for even the most massive network companies, which will be far bigger than any single utility transmission system today).

Special-purpose NuCos (nuclear generating companies) will appear, enjoying particular tax and regulatory treatment and supervised by the Nuclear Regulatory Commission (NRC) rather than any state commission. These NuCos will house "good" nuclear assets, owned by a consortium and operated by highly skilled and financially vigorous engineering firms with substantial sinking funds for decommissioning and spent-fuel storage costs. Tax-exempt bonds will form some part of their capital structure to reduce the cost of capital. Special depreciation treatment might also be invoked to shield cash flow while the sinking fund grows.

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